How to choose between buying and renting a house

House rents in India are rising after witnessing a decline in 2020 and 2021 due to the pandemic. In most major cities, house rents have increased at an annualised rate of 9-12 percent in the last two years. The maximum rise in housing rent has been in IT sector hubs such as Bengaluru, Hyderabad and Pune, with an increase of 17-30 percent in prime locations, according to a survey by Anarock Research.

Alongside, housing prices are also rising across India after some moderation during the COVID-19 years. They were up 5.9 percent year-on-year in the third quarter of 2023, according to Knight Frank’s Global House Price Index. According to a survey by the rating agency Crisil, home prices in India have increased at an annualised rate of around 6 percent on average in the last 20 years.

At the other end of the equation, interest rates on home loans have increased by around 200 basis points in the last two years after hitting a record low in 2020. This has translated into higher equated monthly instalments (EMI) on home loans. 

The interest rates could rise further in future if the liquidity condition remains tight as is the case right now or if inflation doesn’t come down as anticipated by the Reserve Bank of India.

The ever-changing dynamic of house rentals, home prices and interest rates creates a dilemma in the minds of working professionals in India – should you buy a house or live in a rented house and save yourself the hassle of paying EMIs on a home loan? 

Also Read: Five tips to bid for a bank auction property

It’s a bigger dilemma than before because, for many professionals and office goers, home is now also a place of work, thanks to work from home (WFH) in the post-pandemic world. In the past, however, homes were a place to retire and rest after a hard day at work. This was especially true in metros cities where professionals would be out for 12-14 hours at a stretch.

WFH has also forced many professionals to reassess the suitability of their current residence and many found this to be less than ideal for the post-pandemic world. Most homes are either too small or not built for WFH or are in the wrong locality. Not surprisingly many people are now actively looking for new homes that will better fit the new work-life balance and also provide enough breathing space to their family members.

This brings us back to the original question – should you buy a new house or rent a property in a locality of your choice? Buying a house is most often the biggest financial investment and expenditure for a typical urban dweller in the country. So, before you take a plunge and sign on the property paper let’s break down the pros and cons of the decision.

1. Buying a house means a large committed monthly expense for the next 20 years or even 30 years. This means spending a significant chunk of your monthly salary or income on servicing loans for most of your working life. This will require a fair bit of financial discipline and motivation not to mention financial and lifestyle sacrifices at least in the initial years.

In contrast, rental expenses are much lower than EMIs on home loans and you have the flexibility to move to a cheaper locality given work from home. This provides you and your family with financial headroom, something not available to families with a fixed monthly commitment towards EMI.

Also Read: Five tips to tackle rising interest on your loans

2. The interest on home loans is once again on the rise after declining sharply in 2020. 

Monthly EMIs on home loans currently work out to be anywhere from Rs 850 to Rs 1200 per Rs 1 lakh worth of loan for a tenure of 20 years. 

The EMIs had declined to as low as Rs 700 at the height of the pandemic scare in 2020. Higher EMIs increase the financial burden of home loans and raise the overall cost of home ownership.

3. Home purchase also requires you to pay margin money or a down payment while buying the property. Most banks ask for a 20 percent down payment from borrowers though it can be reduced to as low as 5 percent in special cases. 

The greater the down payment, the lesser your EMI expenses. A house worth Rs 50 lakh will require you to make a down payment of around Rs 10 lakh. 

This means that you need to start saving a few years prior to your decision to buy a house or dip into your retirement corpus such as a provident fund, or take help from your family and friends or do a bit of both.

Also Read: Five investment options for senior citizens

4. As a homeowner, you will also need to spend money on maintenance, property taxes and occasional repairs and refurbishments. While the maintenance cost is levied by the housing society that provides the common facility, property taxes are charged by the municipal bodies. 

At the prevailing rate, running expenses could be anywhere from 1-2 percent of the property acquisition cost depending on the amenities and the apartment size. Expect these expenses to rise at an annual rate of 4-5 percent in line with the cost of living.

5. A tenant on the other hand has to only bother about the monthly expenses and leave all other worries to the landlord. Besides, rents are still much lower than EMIs for apartments in most cities. For example, at the current home loan interest rate of around 9.5 percent, a house worth Rs 50 lakh will cost around Rs 37,300 as EMI assuming a down payment of 20 percent. 

In comparison, the same apartment can be taken on a monthly rent of around Rs 10-15,000 depending on the locality or the city. However, unlike EMI which is largely fixed during the tenure of the loan, the rents are expected to grow at 8-10 percent every year. 

6. As a tenant you also have the option to invest the potential down payment or the margin money into high-yielding assets such as equity mutual funds, corporate deposits or provident funds. 

An initial investment of Rs 10 lakh into a diversified equity mutual fund will grow to a corpus of around Rs 61 lakh at the end of 20 years assuming an annual return of 10 percent. 

In the last five years, diversified equity mutual funds have given 18 percent annualised returns on average. This is an opportunity loss for home buyers that they can hope to recover through the appreciation in their home prices over the years.

Also Read: Seven ways to save and grow your money

7. Given this, at the end of the day, buying vs renting a house becomes a long-term financial decision. 

A back-of-the-envelope calculation shows that living in a rented apartment is rewarding if you are financially disciplined to invest the monthly savings in the difference between rents and potential EMIs in high-yielding assets such as equity mutual funds. 

In contrast, buying a house is financially more rewarding if it appreciates in value over a period and you have a high-spending lifestyle. For the latter home purchase becomes a forced saving and long-term asset that they can monetise in their old age or in financial emergency. Assuming home prices rise at an annualised rate of 6 percent, the house price will triple in value over 20 years and your initial Rs 10 lakh equity investment in the house will appreciate by around Rs 1.32 crore.

8. So, when you decide to purchase a home rather than take it on rent, you have decided to live a frugal and financially disciplined lifestyle. Homeownership forces you to raise your savings directly or indirectly and cut back on discretionary spending and lifestyle choices such as exotic holidays, expensive cars, jewellery or even luxury clothing. This makes homeownership a lifestyle issue for many, especially those with a zest to get a taste of good things in life and explore the world.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

Also Read: Five top-performing retirement mutual funds

Look up our YouTube Channel